An Update on 2021’s Euphoric Sentiment

The SPX's growth/value ratio is on the move again

Feb 12, 2021 at 2:50 PM
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A few weeks ago, we checked in on how investor sentiment was looking for the New Year through a handful of useful indicators. Since we have now entered the second month of 2021, it seemed appropriate to revisit any changes that may have taken place since the start of the year. While a few weeks may not seem like ample time for a significant change to happen, we know from our experience with last March’s Covid-19 market crash that anything is possible on Wall Street. A more recent -- and pertinent -- example is the extreme volatility and broader-market selloff stocks experienced at the end of January, following the GameStop (GME) Reddit mania.

As stated in the first check-in, "There's still a ‘buzz’ to 2021, thanks to President-elect Joe Biden's thankfully seamless inauguration and the ramped-up vaccine efforts many are hoping will come along with the new administration. The Dow, S&P 500, and Nasdaq all boast very muted gains to start 2021, yet, as we're about to see, investor optimism is filled to the brim. Framing our content for this check-in is a similar but new graph below, with updated statistics from Schaeffer’s Senior Quantitative Analyst Chris Prybal, comparing the first day of 2020, to Feb. 3, 2021.


First on the list is the 10-day buy-to-open equity-only put/call volume ratio, which sat at 0.42 at the International Securities Exchange (ISE), Cboe Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) in January of 2020. Now, the reading comes in even lower than it read back a few weeks ago, now at 0.32. This suggests that the reading continues to sit in the lower rungs of the last four years, ripe for call buyers to enter the ring, if our contrarian viewpoint stands.

The Options Clearing Corporation (OCC) all-exchange, equity-only, 10-day option put/call volume ratio also has dipped lower from when we last checked in. However, this ratio of 0.51 does remain just above the December 2020’s first-ever dip below 0.50. Contrary to the ISE/CBOE/PHLX data, this reading suggests calls continue to take precedent over puts for the OCC options traders.

Another point of interest for me was the S&P 500 Index (SPX) Growth/Value ratio. In our first check-in, the Growth/Value was extending its multi-month trend lower, though it did remain above the 2020 starting ratio of 1.52. An unprecedented and highly publicized 12 months then occurred for growth stocks, which saw the ratio balloon alongside the SPX, but then roll over and seemingly limp into 2021, even while the SPX retained its strength. Now, not only has the ratio reversed course but, it stands at 1.96, just shy of 2.0 -- a level not reached by the S&P Growth/Value since November 2020.


Circling back to the overarching question that arose as the theme to start 2021, what should you feed into in regards to market optimism? To echo Senior Market Strategist Matthew Timpane, it’s most ideal to allow price action guide your decisions and utilizing options that put less dollars at risk relative to equities. This way, optimism can be less of a gamble and more of a supported and calculated risk of "hope" for your trading.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, February 7.


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